What is the Debt Ratio? This is a question that customers ask when they are consulted by a financial officer about a loan. Indeed, this concept is still very foreign to many people, but it is associated with the essential interests of the borrower.
In this article Fastloans.PH will answer your questions about Debt ratio (DTI) most accurately!
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What is the debt ratio?
To understand what the Debt ratio is, we will need to relate it to the debt-to-income ratio because that is the financial term for this number. According to the explanation of financial experts, Debt ratio is the relationship between the total amount of debt to be paid and the total income of the borrower, in short, this is the debt-to-income ratio.
DTI is considered a very important factor for banks to consider and approve loans. If this ratio is within the allowable limit of the bank, the loan application will be approved. And vice versa, if this number is too high, exceeding the bank’s allowable rate, the loan application will be rejected.
The reason is because Debt ratio will show the borrower’s financial ability in the process of paying installment loans to the bank. Therefore, to ensure capital return, the bank only lends loans to customers with sufficient financial capacity and conditions.
The assessment of the Debt ratio will help the financial unit to limit the risk of not getting the capital back in the process of providing loans.
What is the meaning of debt ratio?
Based on the explanation of what the term Debt ratio is above, we already know the meaning of this indicator. Specifically, this term has the following meanings:
The debt-to-income ratio directly determines the interests of the financial institution, the borrower and the borrower’s right to borrow.
It is an important basis that carries a decisive factor in the process of reviewing documents on the side of the financial unit.
Shows the borrower’s financial capacity compared to the loan requested by the borrower. From there, the borrower and the financial unit will have to make adjustments for the loan to be approved.
Help financial units reduce the risk of bad debt and review documents.
Because of the above implications for financial institutions and borrowers, this Debt ratio is very important.
How to calculate debt-to-income ratio
To know the Debt ratio of a borrower, the financial unit will have a formula to accurately calculate this ratio. In which the calculation formula will closely follow the total income of the borrower.
Specifically, the calculation of the debt-to-income ratio is applied as follows:
DTI = Total monthly debt / Total monthly income before tax
Total monthly debt: The amount the borrower has to pay for debts such as buying a house, buying a car, and taking out a consumer loan.
The debt-to-income ratio will not take into account the borrower’s necessary personal expenses such as food, accommodation, transportation, etc.
A couple has a monthly pre-tax income of PHP 80000. Currently, this couple has the following monthly debts:
Payment for credit cards: 5000PHP.
And this couple is in need of a loan to buy a house with a monthly loan of 20000 million Peso.
From the above numbers we can calculate DTI = (5000 + 20000)/60000 = 0.42 ie 42%. Based on the above 42%, the financial institution or bank can approve a home loan for this couple.
Above we have explained to you what Debt ratio is? And how to calculate the debt-to-income ratio for loan approval. If you have any questions, you can contact us, we will answer you as soon as possible.